Interest Rates just went up a quarter of a percent.

[Smoke Pursuit]

THE cost of mortgages is about to rise after the Reserve Bank decided to lift interest rates by a quarter of a percentage point today.

The increase - the first since March last year - means those with mortgages will need to find, on average, a further $42 a month to cope.
The official cash rate now stands at 5.75 per cent - the highest level since February 2001.

The RBA sets interest rates to keep inflation below 3 per cent.

Inflation stood at 3 per cent over the year to March 2006, rising gradually with higher fuel prices and other goods and services.

But modelling by the National Bank of Australia showed that, excluding the influence of oil, inflation would rise to 3.2 per cent by late this year and remain there throughout 2007.


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The NAB business survey released yesterday suggested the unemployment rate could drop to 4.75 per cent later this year, which would put further pressure on wages costs and inflation.
However, economists had been split on the need for an increase right up until today's announcement.

Macquarie Bank senior economist Brian Redican had argued against the move, saying high petrol prices were creating uncertainty about the strength of the economy, price inflation and consumer spending.

"We simply think there's a case for letting the dust settle," Mr Redican said. "If you do raise rates while petrol prices are rising, you could have a surprisingly large impact on consumer spending that you really don't want to produce."

Families have already been hit by the equivalent of two interest rate rises – or $80 a month – due to petrol price increases, meaning petrol is doing the work of an interest rate rise by curtailing spending.

Fuel has soared from just over $1 a litre in the early months of last year to about $1.40 today, putting strain on budgets and forcing people to rein in their expenditure.

Petrol price rises in recent months have added $40 a month to the cost of filling up a car – or $80 for a typical household of two vehicles – compared with the same time in 2005.

CommSec economist Craig James said: "If the Reserve Bank was concerned spending was picking up and impacting on inflation, then higher petrol prices are doing their job for them by keeping spending under control so that consumers do not over commit themselves."

The Reserve Bank board met yesterday to make its decision on whether to raise rates.

As the board debated the cases for and against intervention, the influential International Monetary Fund indicated its views.

It argued that there appeared to be no real threat to the economy from higher prices.

"Inflation has been contained," it said yesterday.